11 Feb 2022 2 min read

DB schemes: of hikes and health

By Yikai Shen , John Southall

The UK's defined benefit (DB) pension schemes finished 2021 at their healthiest levels since before the onset of COVID-19, according to our latest research.


Our DB Health Tracker, a monitor of the current health of UK DB pension schemes, suggests that the average DB scheme[1] can expect to fund 98.4% of accrued pension benefits as of 31 December 2021.

This is a rise of 0.1 percentage points from the 98.3% recorded three months before on 30 September 2021, and continues the gradual improvement in the health of the country’s DB pension schemes since March 2020. At that point, the figure had dropped as low as 91.4% because of the immediate impact of the pandemic on financial markets.

The final quarter of 2021 saw continued strong performance from growth assets, which lifted our Expected Proportion of Benefits Met (EPBM) measure of UK scheme health. Scheme health also benefitted from a modest drop in inflation expectations during that period, falling back from the elevated levels we saw in the third quarter (the highest levels since 2008), although this was offset by a slight decrease in long-term interest rates.

Yet while the recovery through 2021 was encouraging, the next 12 months will remain crucial for both pension schemes and other investor groups, as we move into an era of tighter monetary policy, as evidenced by February’s interest-rate hike.

In a tight spot

For sterling investors, the most important news came towards the end of last quarter, with the first hike in interest rates by the Bank of England for four years. The further rate rise this month confirmed that the Old Lady of Threadneedle Street’s benign neglect about the inflation outlook is a thing of the past, ‘forward guidance’ has been abandoned as a policy tool, and balance-sheet reduction will soon be upon us.

2022 looks to be a pivotal year for investors as the market navigates the transition from easy to tightening policy conditions both at home and abroad.

It’s also worth noting that, as for previous quarters, we chose to retain a typical sponsor rating assumption of BB in our calculations. This assumption reflects current covenant strength. However, the long-term impact of the pandemic on DB schemes’ health remains unclear. If a B rating were assumed instead, the EPBM figure would be around 1.1% lower.


[1] Based on the Purple Book from the Pension Protection Fund, a typical pension scheme holds approximately 20% in equities, 70% in bonds/LDI, 5% in property and 5% in other assets. For illustration, we assume rates and inflation hedge ratios of 70% of liabilities on a gilts basis and no future accrual or deficit contributions.

Yikai Shen

Quantitative Associate

Yikai works as a quantitative associate in LGIM's Solutions group. Yikai assists in financial modelling and investment strategy development work. Yikai joined LGIM in August 2020 from Duff & Phelps, where he was an associate within the complex asset solution team and assisted in the valuation of credit derivatives. He obtained a master's degree in Maths and Finance from Imperial College London.

Yikai Shen

John Southall

Head of Solutions Research

John works on financial modelling, investment strategy development and thought leadership. He also gets involved in bespoke strategy work. John used to work as a pensions consultant before joining LGIM in 2011. He has a PhD in dynamical systems and is a qualified actuary.

John Southall